Just last week, all three major US indices (the Dow, S&P500 and Nasdaq) registered fresh all-time highs as stronger economic data fuelled optimism on the global economy. However, it wasn’t until yesterday that the local FBMKLCI finally broke out of its consolidation band between 1,750-1,761 albeit on subdued trading volume. Kicking off the week, the FBMKLCI demonstrated some lift in yesterday trade, after the International Monetary Fund upgraded its 2017 growth forecast for Malaysia to 4.8% from 4.5% and indicated its optimism on the country’s prospects.

Although we would not discount the possibility of a follow-through relief rebound, we believe that any near-term gains will likely be limited and short-lived. As yet, the overall technical picture is signalling some risk on the horizon given the “Dead Cross” between the 20-day and 50-day SMAs recently and technically, we see near-term gains to be capped at 1,771/1,775 resistance levels. Having said that, investors who wish to gain a leveraged position may look forward to today’s batch of Naga Warrant listings as added tools to trade the anticipated relief rebound.

In today’s batch, Equity Derivatives will be issuing 12 Structured Warrants comprising of AMBANK-C2 (strike: RM5.25), CBIP (strike: RM2.20), FGV-C36 (strike: RM2.30), MAXIS-C1 (strike: RM6.00), MMCCORP-C7 (strike: RM2.60), MYEG-C23 (strike: RM2.70), PADINI-CL (strike: RM3.67), PCHEM-C12 (strike: RM7.50), SERBADK-CB (strike: RM2.50), STAR-CE (strike: RM2.60), SUNSURIA-CA (strike: RM1.60) and TAANN-CK (strike: RM4.20).

Structured Warrants Commentary

From this batch of Naga Warrant issuance, we see the potential in heavyweights MAXIS-C1 and PCHEM-C12 which we view as proxies for trading a rebound in the benchmark FBMKLCI. We also like PADINI-CL post its 9M17 earnings announcement in May. Note that the underlying counters of these three Structured Warrants had their target prices and ratings upgraded by our research team recently. We also like FELDA-C36 and TAANN-CK, though they are more of chartbased plays.

For MAXIS (OP; TP: RM5.90), we recently raised our target price and rating (from MP; TP: RM5.85) after the company announced its 1H17 results which showed some signs of improvement operationally. More importantly, MAXIS’ share price has also weakened by c.10% since early June, which we believe has priced-in the negative news flow arising from: (i) the recent equity fund raising exercise, and (ii) termination of U Mobile NSA agreement. We see trading opportunities from here and foresee a potential total return of >10% from here.

Similarly, PCHEM (OP; TP: RM8.09) also had its TP and rating upped from (MP; TP: RM7.65) after posting its most profitable quarter (1Q17). The strong quarterly showing was largely driven by strong USD-priced ASP and volume growth as plant utilisation was nearly 100%. Although we expect the coming quarters to be weakened by softer ASP outlook while plants are scheduled for turnaround activities in the next three quarters, FY17 should still come out as a record year, prompting us to revise our forecasts upwards.

Meanwhile, PADINI (OP; TP: RM3.80) reported 9M17 revenue which surged 16.6% to achieve record sales of RM1.1bn driven by additional sales from 13 new outlets (5 Padini Concept Stores, 7 Brands Outlets and 1 free standing store) as well as strong sales growth from its existing stores. We are positive on the strong set of results that was achieved on the back of weak consumer sentiment throughout the year and we expect the earnings momentum to be sustained, underpinned by the strong brand profile of the Group and continuous expansion in new stores. These 12 structured warrants are priced with a range of +/-40% moneyness. All the warrants issued are European Styled Non-Collateralised Cash Settled Warrants with a tenure of 7 months. The gearing ranges from as low as 3.6x to as high as 13.3x and the conversion premium ranges from 14.7% to 67.7%. Call-warrants are leveraged instruments. For instance, by participating in MAXIS-C1, an investor is exposed to a gearing of 9.2x. To be more precise, this call warrant offers up to 4.5x effective gearing for traders. Given our fundamental target price of RM5.90 (implying a potential upside objective of 7.2%) based on the EOD price of RM5.50. Theoretically speaking, a 7.2% increase in the underlying price should translate to ~32% gain in MAXIS-C1. This general estimate is applicable to other Naga Warrants as well

Source: Kenanga Research - 25 Jul 2017